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Analyst: Financial Services Is The Hot Sector In ETFs

Enthusiasm abounds for the financial services sector, the second-largest sector exposure in the S&P 500. The Financial Select Sector SPDR (NYSE: XLF), the largest exchange traded fund tracking financial services stocks, is up 15 percent since the start of the fourth quarter.

Analysts are taking note. CFRA Research recently upgraded its rating on the financial services sector from Marketweight to Overweight. On the back of its fourth-quarter surge, XLF is up 20 percent year-to-date after lagging other sector ETFs for much of the year.

Last week, CFRA raised its sector outlook for the S&P 500 financials sector to Overweight from Marketweight, as part of a series of sector changes,” Todd Rosenbluth, director of ETF and mutual fund research at CFRA, said in a Tuesday note. “The CFRA equity strategy team thinks investors should have an approximately 15 percent weighting in the sector, higher than the 14 percent recent weighting in the broader index.”

Banking On Banks

XLF is a diverisifed play on the financial services sector. The ETF allocates 44.5 percent of its weight to bank stocks, but four other industry groups are represented in the fund. Capital markets firms and insurance providers combine for about 39 percent of XLF's weight.

CFRA has an Overweight ranking on XLF and views positively its low 0.14 percent expense ratio and tight $0.01 bid/ask spread,” said Rosenbluth.

An Insurance Idea

A significant part of the bull thesis surrounding the financial services sector is the expectation of the Federal Reserve raising interest rates later this month and continuing to do so at a gradual pace in 2018. Higher interest rates are seen as helping money center and regional banks, but those higher interest rates can also be a boon for insurance providers.

The $178.7-million iShares U.S. Insurance ETF (NYSE: IAK) is up more than 15 percent year-to-date. Several of IAK's top 10 holdings are stocks CFRA has Buy or Strong Buy ratings on. The research firm has a Marketweight rating on the ETF.